Morgan Stanley — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Morgan Stanley is a global financial services firm operating through Institutional Securities, Wealth Management and Investment Management. Figures below are in U.S. dollars; unless stated otherwise, financial amounts are in billions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenues | $12.99 | $14.75 | $40.92 | $45.23 |
| Net income | $2.66 | $3.72 | $8.91 | $11.40 |
| Earnings applicable to common shareholders | $2.49 | $3.58 | $8.43 | $10.97 |
| Diluted EPS | $1.47 | $1.98 | $4.88 | $6.02 |
| Pre-tax margin | 26% | 33% | 28% | 33% |
| Expense efficiency ratio | 74% | 67% | 72% | 67% |
Q3 ROTCE was 14.6% (15.2% excluding integration-related expenses); nine-month ROTCE was 16.1% (16.6% adjusted). The effective tax rate was 21.4% for the quarter and 21.1% year to date. Provision for credit losses was $35 million in Q3 and $193 million year to date.
Segment results and changes
- Institutional Securities: Q3 revenue was $5.82 billion, down 22% year over year; nine-month revenue was $19.59 billion, down 15%. Lower investment-banking revenue and weaker Equity results were partly offset by stronger Fixed Income. Q3 investment-banking revenue fell 55%, reflecting reduced underwriting and advisory activity; management said lower announced M&A levels are expected to affect advisory revenue near term.
- Wealth Management: Q3 revenue was $6.12 billion, up 3%; nine-month revenue was $17.79 billion, down 1%. Higher net interest revenue—up 49% in Q3 to $2.00 billion—supported results, while transactional revenue declined. The business added $64.8 billion of net new assets in Q3 and $259.7 billion year to date. Q3 pre-tax margin was 27% (28% adjusted).
- Investment Management: Q3 revenue was $1.17 billion, down 20%; nine-month revenue was $3.91 billion, down 12%. Lower average assets under management and weaker performance-based income weighed on results. AUM was $1.279 trillion at quarter-end, down from $1.565 trillion at December 2021, reflecting market losses and net outflows.
Overall, Q3 revenue declined 12% and common earnings declined 30% year over year. Nine-month revenue declined 10% and common earnings declined 23%. Lower investment-banking activity and market-related pressure on asset-based and performance fees were significant offsets to higher trading and Wealth Management net interest revenue. Total non-interest expenses decreased 3% in Q3 and 3% year to date; the expense ratio nevertheless worsened as revenue fell.
Cash flow, balance sheet, capital and liquidity
- Cash flow: For the first nine months, operating activities provided $7.60 billion, versus $33.62 billion in 2021; investing activities used $12.53 billion and financing activities used $3.26 billion. Cash and cash equivalents fell by $16.03 billion to $111.70 billion, including a $7.84 billion adverse effect from exchange rates. Interpret operating cash flow alongside the substantial effects of trading and financing balance-sheet movements.
- Balance sheet: Total assets were $1.160 trillion at September 30, 2022, versus $1.188 trillion at December 31, 2021. Deposits were $338.1 billion, borrowings $220.4 billion, and common shareholders’ equity $92.3 billion. Loans, net of allowance, were $218.4 billion, up from $200.8 billion at year-end.
- Liquidity: Average liquidity resources were $308.0 billion in Q3. The reported average LCR was 136%, above the 100% minimum; the Firm stated that it complied with minimum LCR and NSFR requirements. Management said liquidity was sufficient under its stress tests.
- Capital: Standardized CET1 was 14.8% (16.0% at December 2021); advanced CET1 was 15.2% (17.4%). The standardized CET1 required ratio, including buffers, was 13.2%. SLR was 5.4%, against a 5.0% required ratio. The Firm remained compliant with TLAC requirements.
- Capital returns: The quarterly common dividend was increased to $0.775 per share. The Board authorized up to $20 billion of common-stock repurchases; the Firm repurchased $8.17 billion during the first nine months of 2022. It also issued $1.0 billion of Series P preferred stock in August.
Outlook, risks and unusual items
- Management’s stated ROTCE goal is above 20% excluding integration-related expenses, based on a normal market environment; the filing cautions that market and economic conditions may materially affect attainment. No specific quarterly or full-year earnings guidance is provided.
- Management described persistent inflation, rising interest rates and volatile global markets. Higher rates supported Wealth Management net interest income, but changes in deposit pricing, mix and customer behavior may affect future results.
- Q3 trading VaR averaged $61 million, up from $46 million in Q2, principally due to higher interest-rate and credit-spread volatility and lower diversification benefits. There were two Q3 loss days, neither exceeding 95% Total Management VaR.
- The allowance for credit losses rose to $1.24 billion from $1.10 billion at year-end, reflecting portfolio growth and a weaker macroeconomic outlook. Total loans and lending commitments increased about $19 billion; management’s base case assumed slower economic growth.
- Available-for-sale securities had $5.95 billion of gross unrealized losses at quarter-end, compared with $639 million at December 2021. The Firm said it expected to recover amortized cost and did not intend, nor expect to be required, to sell the securities before recovery.
- Legal and regulatory matters include a $200 million regulatory matter expense recorded in Q2, and effective September 27, 2022, settlements with the SEC and CFTC concerning record-keeping and business communications on unapproved messaging platforms. The filing does not state the settlement amount. Two residential-mortgage cases reached agreements in principle to settle in October. A Dutch tax dispute concerns approximately €124 million (about $122 million) plus interest; the ultimate outcome is uncertain. The Firm also described an ongoing UK competition investigation.
- Direct exposure to Russia and Ukraine was described as limited; the Firm said it was not entering new onshore business in Russia and was helping global clients close out pre-existing obligations.
Most important facts for investors to verify
- Whether investment-banking activity and market conditions further pressure Institutional Securities and Investment Management revenues.
- Whether Wealth Management net interest revenue and asset inflows persist as rates, deposit costs and customer behavior change.
- Capital-ratio trends, the effects of capital distributions and the Firm’s progress toward its greater-than-20% adjusted ROTCE goal.
- Credit performance, allowance adequacy and exposure to slower growth, particularly as lending commitments and loans expand.
- Potential further effects of unrealized securities losses, liquidity and funding costs, and legal or regulatory matters, including any amounts or outcomes not quantified in this filing.